When Starwood’s big suitor from Beijing came unexpectedly calling again last month, aiming to consummate China’s biggest-ever purchase of a U.S. company, its proposal eventually included an extraordinary clause to allay the Americans’ wariness.

Anbang Insurance Group Co. had failed last fall to woo
Starwood Hotels & Resorts Worldwide Inc.,
and Starwood was close to a $12.2 billion sale to
Marriott International Inc.
MAR 0.54%
The Chinese firm was back with an offer eventually reaching $14 billion that included, said people familiar with the bid, a stunning sweetener: Anbang and its partners would pay up even if Chinese regulators blocked the tie-up.

Starwood Chief Executive Thomas Mangas had given his Marriott counterpart, Arne Sorenson, an early warning. “Our friends in China have resurfaced,” Mr. Mangas told him on a March 11 phone call.

After a flurry of negotiations and counterbids came two days of radio silence from Beijing. Then Anbang walked away on Thursday, citing only “various market considerations.”

Chinese companies, which have long flirted with buying big Western companies, have turned into voracious suitors this year, agreeing to $92.3 billion of foreign takeovers in industries from semiconductors to agriculture, compared with $106.7 billion in all 2015, according to data provider Dealogic. While Chinese companies have honed their deal-making skills, said bankers and lawyers who work on the transactions, they still often don’t play by long-established M&A rules.

Other ambitious bidders like Tsinghua Unigroup Ltd., China’s largest chip-design company, for example, have eschewed big Wall Street banks for deal advice, leading to some mishaps. Tsinghua Unigroup prepared a $23 billion bid for
Micron Technology Inc.
last year, but the U.S. chip maker said it never received an offer. The Chinese government also plays a bigger role than Western regulators in many cases even before an offer is made.

In ways small and large, Anbang’s approach to Starwood was unorthodox, from surprise meetings to its shifting offers and a level of scrutiny of the hotel company’s books that to some involved seemed less intense than expected. Most striking was how it suddenly dropped away after indicating it was committed to winning.

In the end, said Fred Hu, Chairman of Primavera Capital Group, a partner in Anbang’s bid, the consortium walked away because the price got too rich. “It was a simple and prudent commercial decision.”

This account of the Starwood saga is based on interviews with officials at the companies involved, others close to them and federal filings.

Anbang’s unusual approach began with its first courtship of Starwood last year. The Beijing company had exploded onto the international scene by acquiring insurers and hotels globally, including its $1.95 billion purchase of Manhattan’s Waldorf Astoria. The conglomerate is also a big player at home, with stakes in Chinese companies ranging from developers and banks to a traditional Chinese medicine maker and a wind-turbine manufacturer.

The bidding war subjected unlisted Anbang to fresh scrutiny over its political connections in China as well as its complex ownership.
Photo:
Weng Lei/Imaginechina/Associated Press

Starwood, which controls the St. Regis, Westin, Sheraton and W Hotels brands, nearly a year ago said it would “explore a full range of strategic and financial alternatives to increase shareholder value,” effectively hanging out a for-sale sign. Months earlier, Starwood CEO Frits van Paasschen resigned amid concerns over the Stamford, Conn., company’s slow growth.

Anbang expressed interest in May, but Starwood officials couldn’t get comfortable that the Chinese company could secure funding. Anbang and its ownership structure remain murky to many inside and outside China, unlike Marriott or any other publicly traded U.S. company.

And Starwood officials saw Anbang Chairman Wu Xiaohui as hard to read. He called a last-minute meeting at the St. Regis hotel in Manhattan to discuss Anbang’s interest in Starwood the last weekend of August, even though some at the company and its advisers had vacation plans they ended up having to change.

Anbang’s reasons for pursuing Starwood were never made entirely clear. In three meetings through autumn, in New York and Chicago, Mr. Wu expressed interest in a variety of deal options. Among them, he floated the idea of Anbang’s taking a minority stake in Starwood. But Starwood didn’t need cash and preferred a deal for the whole company.

On Nov. 3, Anbang withdrew its interest during a meeting when Starwood said it couldn’t proceed “without a written offer with specific financing plans,” federal filings show.

Marriott’s victory

Marriott emerged victorious that month, a surprise given that
Hyatt Hotels Corp.
had been widely expected to prevail.

Starwood executives wondered whether a counter bidder would emerge, expecting any competing bids would follow a December regulatory filing that disclosed information a spoiler would find useful. Such bids would typically have come around January.

Now in March, Anbang was back with its partners, including U.S. private-equity firm J.C. Flowers & Co., Primavera Capital and state-owned
China Construction Bank Corp.
, and their record all-cash offer. China’s previous record U.S. purchase was Shuanghui International Holdings Ltd.’s takeover of Smithfield Foods Inc. announced in 2013 for about $7 billion including debt, according to Dealogic.

The timing of the surprise bid was odd, coming barely two weeks before a scheduled shareholder vote on the Marriott deal with little time to win over Starwood’s board.

Starwood officials were pleased but cautious of Anbang and its chairman. Still, Anbang’s new approach, made March 10, was too rich to ignore. Starwood’s advisers at
Lazard
and
Citigroup Inc.
told Anbang its bid of $76 a share was a good start but not high enough to displace Marriott. They also wanted proof Anbang had financing.

Anbang in short order raised the offer to $78 and provided a letter of credit from China Construction Bank for the full amount.

Anbang’s negotiating approach sometimes confounded Starwood. Mr. Wu would arrive at meetings, many at The St. Regis, with a team of about a half-dozen Chinese educated at U.S. business schools. Mr. Wu served as Anbang’s lead negotiator. At times his bankers didn’t speak during entire meetings, they said, and Mr. Wu didn’t turn to them for advice.

Anbang’s chairman said he loved Starwood’s brands and the cash flow from hotel management. Anbang had few of the obvious synergies Marriott offered, but Mr. Wu sketched out a vision that involved bringing Starwood brands to China’s emerging middle class, which is increasingly traveling. Starwood found the idea of China’s booming travel class appealing, but details on what Starwood’s role would be were scant.

Unknown quantity

Much else about Anbang’s plans wasn’t clear to the Starwood team. They didn’t know what sort of return Anbang expected on its investment, or whether it viewed an acquisition as a long-term proposition. The lack of insight into Anbang’s intentions, along with its opaque ownership, made the buyer’s actions harder to predict.

The bidding war subjected unlisted Anbang, founded in 2004 as a provincial car insurer, to fresh scrutiny over its political connections in China, as well as its complex ownership, a web of 39 corporate shareholders ranging from car dealerships to mining companies. Local media have said some of those firms may have ties to the family of former Chinese leader Deng Xiaoping, whose granddaughter married Mr. Wu.

In contrast, Marriott was a known quantity, and a combination with it would create a hotel company with more than a million rooms and 30 brands, including Marriott’s Ritz Carlton, Courtyard by Marriott and Residence Inn.

Starwood wanted assurance Chinese regulators wouldn’t scuttle any Anbang agreement, a disaster if it happened after the company broke off its proposed Marriott marriage.

Starwood and Marriott had obtained the green light for their deal from antitrust regulators in the U.S., Canada and other countries. Starwood had little insight into how Chinese regulators would react to the proposed Anbang deal.

So Starwood and its advisers insisted Anbang agree that a deal would still close, and the cash would change hands, with or without Chinese regulatory approval. The Chinese company agreed. That sort of guarantee is rare and demonstrates the wariness with which some Western companies approach Chinese bidders and how intensely Anbang wanted its prize.

Anbang’s incursion cost Marriott over $1 billion more than it had originally agreed to pay for Starwood. Above, Marriott CEO Arne Sorenson in Berlin last year.
Photo:
Fabrizio Bensch/Reuters

On March 18, Anbang put in an binding offer, and three days later Starwood announced it would spurn Marriott for Anbang’s $13 billion bid.

Many investors expected Marriott would walk away and collect its $400 million breakup fee. It had five business days to respond, and analysts predicted Marriott would be unwilling to get into a bidding war with a deep-pocketed Chinese company. They warned the stock portion of a higher offer could too heavily dilute existing shareholders’ stakes, and borrowing to raise the cash component could put Marriott’s credit rating at risk.

Marriott surprised them with a proposal then valued at $13.6 billion containing more cash than its previous stock-and-cash bid. Starwood agreed to Marriott’s new offer, turning its back on Anbang in a move announced March 21.

Marriott executives were hopeful but knew Anbang was likely to counter.

The morning the new deal was made public, Mr. Sorenson was in Havana as part of President Obama’s visit. The Marriott CEO was on an early-morning call from his hotel room with lodging analysts to discuss the offer when the phone went dead. For a nerve-racking minute, he wondered if he had lost the call for good, but it proceeded.

Anbang came back later that week with an all-cash offer of $81 a share. Mr. Wu scheduled a meeting in Florida on Easter Sunday, again irking those at Starwood who had changed their August vacations.

As before, Starwood leaned on Anbang to make a higher offer, and Mr. Wu said he would go to $82.75, or $14 billion.

Starwood said it wanted proof of financing and regulatory approval at the higher offer. This time, that wasn’t immediately forthcoming. Still, Starwood announced the higher bid on March 28, saying it was “reasonably likely to lead to a superior proposal.”

Marriott considered another bid but knew whatever it could cobble together wouldn’t equal $82.75 in cash. Instead, it began a lobbying campaign to stress the strategic value of its combination while raising questions about Anbang.

Marriott issued a press statement saying Starwood investors should think hard about whether Anbang could close the deal “with a particular focus on the certainty of the consortium’s financing and the timing of any required regulatory approvals.”

Starwood waited for Anbang to agree to its demands and make the bid binding. Mr. Wu indicated to Starwood officials he might raise his bid further to knock Marriott out once and for all but needed to speak to his owner group.

“It’s great to have clarity,” Marriott’s Mr. Sorenson said in an interview on Thursday. “We’ve been struggling with a lack of clarity for the last three weeks.”

It was especially difficult, he said, because “we had very little insight into what the competing bidder was prepared to pay.”

Anbang’s incursion cost Marriott over $1 billion more than it had originally agreed to pay for Starwood.

Mr. Hu of Primavera Capital, the Anbang partner, chalked the episode up as a learning experience. “Some missteps by some players are just unavoidable,” he said. “Nevertheless, it is far too early to declare Chinese forays overseas will all end in tears. People who hold such views are either arrogant or ignorant.”